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A Federal Reserve Bank of Cleveland research economist asserted Wednesday that the government may increase long-term housing sustainability by putting forward a homebuyer down payment assistance as opposed to interest rate subsidies.
O. Emre Ergungor’s calculations are based on findings of previous researchers who suggest that a 1% interest rate subsidy may create an additional 74,000 homebuyers, but downpayment assistance of $3,200 could increase homeownership by up to 541,000 over a long timeframe.
"We don't want people just to buy a house, we want them to keep their homes," said Ergungor.
However, Ergungor said these specific numbers carry a large margin of error and are not his recommendations.
“To make this simple point, my study assumes that the additional down payment comes from the government,” he said in his economic commentary. “But a higher down payment does not have to be in ‘assistance’ form in its entirety. In fact, one potential policy goal in the future could be to facilitate a return to the old strategy of saving to become a homeowner.”
A lower cost is not the only advantage of a down-payment program, he said. Researchers show the greatest barrier to low- and moderate-income homeownership is the lack of a down payment.
More people decide to become homeowners when the downpayment restrictions are eased than when mortgage rates are reduced.
According to the fiscal year 2010 budget, the U.S. government will spend $780 billion in tax expenditures over the next five years to subsidize housing through mortgage interest and property tax deduction, a small fraction of which will go to low- and moderate-income households.
Tax exclusion of interest on state mortgage revenue bonds will total some $5.8 billion over the next five years, he said.
“Historically, assistance has taken the form of either interest rate or down payment subsidies, but recent research suggests that down-payment subsidies are much more effective,” Ergungor said. “They create successful homeowners—homeowners who keep their homes—at a lower cost.”
Even after accounting for the cost of the additional new homebuyers, the downpayment program is still cheaper, he said.
The commentary also discussed tools to encourage saving for homeownership but said there were important issues to better understand before settling on a particular tool.
“Many new ideas are likely to burgeon out of the ongoing policy debate,” he said.
Ergungor focuses his research on financial intermediation, information economics, housing policy and credit access of low-moderate income households.
[Update: the Federal Reserve Bank of Cleveland did not intend to suggest Ergungor's report is connected to the now-expired homebuyer tax credit]
Write to: Shaina Zucker

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